Corporate governance is becoming increasingly important for the future fitness of financial service providers (FSPs), as legislation in the financial services industry moves from a rules-based approach to a principle-based approach.
Corporate governance is the system by which companies are directed and controlled. Key Individuals, either in their own capacity or as a member of your Financial Services Provider’s (FSP) Board of Directors, are responsible for the governance of your company.
The board’s responsibilities include setting the FSP’s strategic objectives, providing leadership to achieve the objectives, overseeing and managing the business, as well as reporting on key actions and progress. Corporate governance is therefore about what the FSP’s board does and how it sets the values of the company. It is distinguished from the FSP’s daily operational management by full-time management. Good corporate governance starts with good leadership, and this is evidenced by leading through example.
Requirements for corporate governance
The requirements of Board Notice 194 (BN194) of 2017, as well as the FAIS General Code of Conduct (GCoC), help one understand the regulatory requirements for corporate governance.
Section 36 of BN194 deals with general operational ability requirements. Section 36(a), in particular, requires an FSP to have the operational ability to effectively function as a particular category of FSP. In addition, section 11 of the GCoC requires the FSP to eliminate risk where possible using the appropriate systems, resources and procedures.
Read together, these sections illustrate that operational ability and risk management (a risk-based approach) are not separate requirements, but rather complement each other. It reinforces the importance for an FSP to implement the various systems, policies and procedures referred to in the operational ability section. This demonstrates that the FSP’s conduct is aligned with the processes outlined.
BN194 sets the stage for improved operational ability, underscored by the principles of corporate governance. This places the responsibility on company leadership to be involved and also to be held accountable and responsible for the execution of best business practices.
In 1993, retired judge of the Supreme Court of South Africa Mervyn E King chaired a committee on corporate governance. From this committee came a number of King Reports on corporate governance and, more recently, the King III and IV Reports.
The reports provide guidelines for the governance structures and operations of all South African companies, irrespective of their size. King III provides the principles of good corporate governance, whilst the recently published King IV Report focuses on the outcomes of these principles.
Although the provisions in the King Reports are not legislated, the principles are being incorporated into other legislation, as can be seen with BN194. For example, the requirements relating to business plans, remuneration policies and stronger risk management policies and processes are adapted from various principles from King IV. These are now included as operational ability processes and/or requirements that need to be evidenced in FSPs.
Importance of leadership
Good corporate governance starts with good leadership. Former Public Protector Thuli Madonsela said: “We cannot lead others if we cannot lead ourselves. The hallmark of self-leadership is responsibility.”
Further, these words are reflected in the objective that King IV strives to achieve:
The code brings to the fore, the role of ethical and effective leadership. Today’s leaders must deliver seamless strategy and operational excellence.
- Providing direction to organisations through strategy.
- Giving effect to that strategy through the development of appropriate policies
- Providing oversight over management’s implementation of the strategy
- Demonstrating accountability and transparency through disclosure.
Corporate governance is more than just meeting regulatory requirements; it is about good leadership, long-term business success and remaining future fit.
Masthead’s GAP analysis guides FSPs to identify the procedures to be implemented to meet the new Fit and Proper requirements. This incorporates an action plan that assists in identifying the risks, with guidance to implement these requirements. Contact your nearest Masthead office to find out more.